Win Some, Lose Some : Tax Reform Has Been a Mixed Bag

Jan Duncan writes off tax reform as a big loss. The Los Angeles surgeon says his tax bill will quadruple this year, due to a change in how his medical practice is being taxed. And tax reform has prompted him to change his finances in other ways: He doesn't plan any more contributions to his individual retirement account, and he has refinanced his home, partly to pay off some consumer debts.

But to Hyman Gordon, reform has been considerably less traumatic. The Los Angeles retiree is far more worried about how rising interest rates have cut the value of his bond investments. "Taxes have not had as great an impact as my bond losses," Gordon said.

Sweeping Changes

When President Reagan signed the Tax Reform Act of 1986 last Oct. 22, many experts proclaimed it the nation's most sweeping tax package ever, and said it would alter dramatically the ways consumers and businesses save, spend and invest.

Yet as the new tax law approaches its first anniversary, its impact has been decidedly mixed. Some high-income earners who once found refuge in tax shelters have been hit hard, but many middle-income and lower-income taxpayers have yet to feel any significant change.

For many individuals--and for the economy as a whole--tax reform has been largely overshadowed by rising interest and inflation rates and other factors.

The new set of rules has produced many of the expected results, and some surprises. As predicted, consumers are shifting away from credit cards and other non-mortgage types of debt, which are losing deductibility, and toward home-equity loans, which largely retain their tax advantage. Sales of tax shelters, from windmill investments to apartment buildings, have plummeted.

Also to no one's surprise, tax reform has discouraged some people from putting funds into individual retirement accounts and certain types of real estate, while stimulating sales of tax-favored insurance products.

So far, tax reform has defied some predictions. It has not slowed economic growth or business capital spending as much as had been anticipated. And, even with a higher capital gains tax, the change is widely believed to have helped boost stock prices earlier this year, as many investors put into the market money that, under the old tax code, would have gone into tax shelters and real estate.

The reform also has failed to reverse a decline in savings. Investor interest in tax-free bonds, expected to get a boost from tax reform, instead has slumped as interest rates have risen. Charitable contributions, expected to be hurt by reform, instead show signs of continued growth. Limited partnerships that emphasize income over tax breaks are enjoying strong growth in sales.

Although tax reform was dubbed tax simplification, for many taxpayers it has been anything but simple. The complicated new rules and forms have frustrated many people.

"Tax laws are sufficiently complicated that even a smart person can no longer do his own return," said Richard B. Ross, executive director of the Chicago-based Center for the Study of Investor Behavior.

Many analysts pointed out that a year may not be enough time to assess the full impact of the new rules. Many taxpayers won't notice what is different until they file their returns for 1987 next April 15, and learn whether they owe money or will get refunds.

Full Effect Delayed

And, many provisions of the new law are not effective until 1988 or 1989. For example, most workers have yet to see any major effect on their pensions or other employee benefits, because many changes in this area will not be in place until 1989.

Many taxpayers also are postponing major investment decisions, worried that Congress may raise tax rates soon, researcher Ross said.

"It may be another two or three years before we can know for sure whether the expected effects will occur," said Allen Sinai, chief economist for the brokerage firm of Shearson Lehman Bros.

"Tax reform's been a non-event" for many individuals so far, said Stephen B. Love, a certified public accountant and financial planner in Torrance.

Mixed results were expected. By lowering tax rates and tossing out a host of deductions and special tax privileges, supporters of tax reform hoped to spur savings and investment in interest-bearing assets such as bonds, while hurting tax shelters and certain real estate and other investments that primarily provided tax breaks instead of income.

Confusion's Impact

One of the biggest impacts so far has been the confusion of trying to wrestle with new rules and forms, particularly the W-4 withholding form. One result: increased demand for accountants, tax preparers, tax-guide books and other aids.

"We had a dozen people wanting help with their W-4s," said James Kirby, a Fullerton accountant who said clients had never before needed his help with the form. The extra work prompted Kirby to add to the five-person staff at his small accounting firm.